Does Closing a Credit Card Affect your Credit Score?

  • 7 min read

There are many reasons why an individual may consider closing off a credit card including having too many credit cards, the card issuer has raised the interest rate or added on fees to the terms, or if you simply no longer want that credit card anymore, whether it be because of bad terms and conditions or other reasons. Do know though, that when you close your credit card, it may impact your credit score.

Credit cards that have balances should not be closed, credit cards that are your only source of credit, or if it was your first credit card, should not be closed. By closing these cards, your credit score may change.

It is important to make sure you go about it carefully, as one misstep can harm your reports. When scorers are determining the impact of open and closed credit cards, they primarily look at your credit utilization to determine how much available credit is being used. A lower utilization generally leads to a higher credit score.

The Answer is Complicated

You need to do this slowly, so consider all factors. For example, if you have two credit cards, one with a balance of zero and one with a balance of $500, and each has a limit of $1,000, you have a credit utilization of 25%.

However, closing the $0 balance card will change that, doubling the utilization from 25% to 50%, despite the debt remaining the same. In other words, it is often best to keep cards open as much as possible, especially if you often carry a balance on other cards. You can prevent future increases to your credit utilization by keeping these cards active and open, even if you do not use them.

There is a big distinction between credit cards and loans and how they are scored, particularly in the “amounts owed” category. Loans do not have the same weight than credit card debt does, including the utilization and other calculations that contribute to debt. These differences are particularly important to note if you are looking for loans, particularly student, auto or mortgage.

These two types of credit are affected differently by credit inquiries. While no inquiries that are more than a year old will count in a credit score, card inquiries for things like applying for a credit line can impact it if they have occurred in the last 12 months. However, loan inquiries are ignored for the first 30 days. After those 30 days, one inquiry occurring within any 14-45-day period can impact the score. The day limit depends on the scoring model, as many credit bureaus use a different model.

The short answer is, closing a credit card can negatively impact your credit score. This is true for several reasons. First, the more credit cards you have open, the higher your available credit, and the ratio of utilized credit to total credit is a factor in determining your credit score. Therefore, if you have a credit card that you do not use, the entire available credit of that card counts towards your ratio, which makes your credit utilization ratio improve.

People often think that closing a credit card means that they can wipe their bad payment history from their credit report. This is not true. The card issuer will eventually remove your card information, but the negative information will stay on your card for the maximum amount of time allowed by law. There is no escaping your credit history.

Some people do balance transfers and move all their debt to a single card. This is usually because banks will offer you a certain period where they will not charge interest for balance transfers. The plan is for you to transfer your balances over and pay them off before the interest is charged. This is actually a great way to minimize the amount of interest you pay but try not to overload any one card. Your score could go down if you are using more than thirty percent of the credit that is available on any card, so when transferring balances, make sure you don’t put more than that on any one card.

Credit Card Influence on your Credit Score

Credit cards have a big influence on your credit score because they provide great information about how you manage your money. They tell a lot about your borrowing habits because when it comes to your credit cards, you have the power to determine how much you use them and how much you will pay every month. There is an element of freedom to manage your debt that you do not get in some of the other systems.

Opening a Credit Card Account

When you start a new credit card account, lenders will run a check on your credit worthiness. The higher your credit score, the more likely is your ability to pay the bills. However, a large number of credit inquiries in a short period of time will significantly lower your credit score, because research points out that people looking for credit are more likely to get into financial trouble over the ones who are not looking for credit.

But if you open a new account, it can improve your credit score by lowering your credit utilization ratio. If you have a credit limit of $1000 and you have $500 credit card debt and if you start a new account that takes your credit card limit up to $2000 then it will lower your credit utilization ratio from 50% to 25% which will boost your credit score.

Similarly closing an account will shoot up your credit utilization ratio by having the opposite effect and lowering your available credit. So, if you do not trust yourself with a card, instead of closing the account, you might just want to cut the card or put it in the safety deposit box.

How do you Close a Credit Card Correctly?

  1. Always pay off the balance before you close it. By doing this, it will give you one less credit card balance to worry about and it will lessen the impact on your credit score. If you were to close the credit card with a balance on it, your credit score will suffer more, and you will still be responsible for making at least the minimum payments until it is paid off.
  2. Contact the card issuer’s customer service using the number on the back of the card and tell the representative that you want to close the credit card account. The representative will more than likely try to talk you into keeping the account open and may offer you incentive rewards for doing so. Often, they will offer reward programs, or a lower interest rate. Always write down the date and time that you phoned and made the request.
  3. Send a written letter to the card issuer that requests that your credit card account be closed. Make sure to include your name, address, and the last four digits of your credit card number. If you have phoned as it is suggested, always state that you made the request on the phone and write down the date that you requested this. Always keep a copy of the letter for proof and send it through certified mail.
  4. After you have made this request, request a copy of your credit report to see if the closed account is reflected on the report. You will want to make sure that your credit report is up to date with all accounts.
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Christopher - BSc, MBA

With over two decades of combined Big 5 Banking and Agency experience, Christopher launched Underbanked® to cut through the noise and complexity of financial information. Christopher has an MBA degree from McMaster University and BSc. from Western University in Canada.